• Overall VC funding is down as firms increase investments in late-stage deals and seed funding slows

• Private equity, corporate VCs emerge as alternative financing sources

Investment in financial technology may have fallen a spectacular 47 percent last year but it is perhaps just an indication of the maturation of the industry.

Total global funding to fintech companies fell to 47.2 percent to $24.7 billion in 2016 from $46.7 billion the year before, according to KPMG’s quarterly fintech funding report, The Pulse of Fintech, which came out in February 23. Deal activity dropped to 1,076 from 1,255 the year before.

“The appetite for fintech investment is strong and will remain so for the foreseeable future,” said Steven Ehrlich, lead analyst for emerging technologies at Spitzberg Partners. “However, things are certainly not as frothy as they used to be, especially for the early stage companies.”

That’s largely due to investors’ renewed focus on business models and plans for profitability, Ehrich said. And as always, regulation. “Startups are realizing that they cannot skirt those requirements and financial institutions are working to make sure that everyone is playing by the same set of rules.”

Below is a breakdown of who’s funding fintech activity on a global level today.

VC deal volume is down, but dollar value keeps growing

The number of venture capital deals fell to 1,436 last year from 1,617 in 2015. However, those deals continued to increase in value, rising to $17.35 billion globally in VC investment from $15.64 billion the year before.

Chris Hughes, vice president at Revolution, a venture capital firm that invests in growth-stage companies, said growth slowed following 2014 and 2015 markets, two fast growing years for fintech VC funding, when the industry’s most exciting companies, marketplace lenders Lending Club and OnDeck, had trouble growing and reaching profitability. As a result, “public market investors started to reprice these companies based on their performance relative to their traditional peers and monitor metrics like net interest margin, return on equity and profitability,” he said.

Ehrlich said after getting early returns from the Lending Clubs of the industry, many began realizing how difficult it really is to unseat legacy financial companies.

“In the lending space it may have been easier to offer attractive returns on products when rates were at historical lows, but now that they are rising again it the burden is being placed on them to demonstrate significant value over the incumbents, which is difficult to do,” he said.

Early stage deals are down, late stage deals are up

According to CB Insights, seed investments fell to 29 percent at the end of 2016 from 35 percent the year before, while Series D investments rose to 7 percent, showing that while investment volume is still larger among younger companies, interest in those startups slipped over the last year while interest in more established, developed companies grew.

Private equity is emerging as an additional source of fintech investment

The value of private equity deals in fintech fell by about $7 billion between 2015 and 2016, but deal volume rose to 112 from 99. PE firms have been investing in technology in general, according to KPMG, “so it comes as little surprise that many are targeting businesses within the fintech space.” These companies have been hard-pressed to find worthwhile investment opportunities and as they broaden their deal-sourcing strategies, “those with financial services and technology portfolios may be dialing up activity,” according to the report.

Corporates and startups are more open to working together

Banks and startups are starting to work together more aggressively this year, as evidenced by JPMorgan Chase’s partnership with OnDeck Capital or the Wells Fargo partnership with robo-advisory SigFig. The venture arms of financial institutions increased their participation in fintech startup investment to $8.5 billion (17 percent of deals) in 2016 from $4.9 billion (14 percent of deals) the year before.

Corporates backed 29 percent of VC-backed fintech companies last year, up from 23 percent in the previous year.

“There is a shift where the fintech startups and established firms are realizing that they can have symbiotic relationship,” Ehrlich said. “It is challenging for [banks] to innovate themselves because it requires beating back entrenched and established processes that often times have their own internal challenges.”